How to Calculate Payback Period
What is Payback Period?
Payback period is how long it takes for an investment to recover its initial cost through cash inflows. Simple but ignores time value of money; discounted payback is more accurate.
Formula
Payback = Year before recovery + (Unrecovered cost / Cash flow in recovery year)
Step-by-Step Guide
- 1List cash inflows by year
- 2Accumulate until initial investment is recovered
- 3Calculate exact time within the recovery year
Worked Examples
Input
Initial: $10k, Flows: $3k, $4k, $5k
Result
Payback ≈ 2.2 years
Recovers in early year 3
Common Mistakes to Avoid
- ✕Ignoring time value of money
- ✕Not handling cash inflows before payback
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